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BLBG: Oil May Fall to $50 in Global Recession, Merrill Says
By Angela Macdonald-Smith

Oct. 2 (Bloomberg) -- Crude-oil prices may fall as low as $50 a barrel next year, about half current levels, in the ``unlikely'' event of a global recession, weighing on shares of petroleum producers, Merrill Lynch & Co. said.

Such a scenario, where global growth in Gross Domestic Product falls to 1.5 percent, isn't the base-case forecast, the bank said today in a report. Merrill cut its 2009 average price estimate for West Texas Intermediate, the U.S. benchmark oil grade, by 16 percent to $90, citing falling demand and the start of new fields in Organization of Petroleum Exporting Countries.

Crude-oil future prices have fallen almost a third in New York since reaching a record $147.27 a barrel on July 11, driven by concerns a worsening financial crisis in the U.S. is crimping energy demand. U.S. oil use is declining faster than expected, while European consumption is falling ``rapidly,'' and OPEC production capacity is ``just about to soar,'' Merrill said.

``Combined, these factors represent significant short-term headwinds for both upstream and downstream companies alike,'' Merrill analysts Mark Hume and Alexis Clark said in the report. ``Notionally it is conceivable that in a worst-case scenario global oil demand actually contracts in the near-term as it did back in the 1980s post the Iranian Revolution.''

Oil demand growth in China and India, the world's fastest- expanding major economies, may slow down in 2009, Merrill said.

China, India

China's crude-oil demand may rise by about 270,000 barrels a day, or about 3.4 percent, while India may consume 40,000 barrels, or 1.4 percent, more crude a day in 2009, the bank said. India's crude-oil use last year rose by 6.7 percent to 2.74 million barrels a day and consumption in China climbed 4.1 percent to 7.85 million, according to BP Plc's Statistical Review of World Energy 2008.

``Against our initial expectations, some of the emerging markets are not keeping up either,'' the Merrill analysts said.

A decline in prices to $50 would impede investment decisions on projects, said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo.

``You're already seeing some delays because of the credit issues now,'' Nunan said. ``Longer-term, this is bullish because it adds to the already chronic supply problem.''

Crude oil for November delivery today gained as much as 1.9 percent to $100.37 a barrel in New York as the U.S. Senate passed a $700 billion financial-rescue package aimed at limiting the slowdown of economic growth in the world's biggest energy-consuming nation.

OPEC Capacity

A ``string'' of fields in Saudi Arabia, Qatar and elsewhere within OPEC is set to increase capacity within the exporting group by about 3 million barrels a day in the next 18 months, the analysts said. In addition, refinery expansions and new projects will add about 900,000 barrels a day of distillate and 700,000 barrels a day of gasoline production capacity, they estimate.

The long-term cycle for oil prices ``remains intact'' because of under-investment in the industry, the Merrill analysts, based in Sydney and Melbourne, said.

``We argue that structural under-investment in the energy sector remains a key concern and once the economy re-emerges from its current decelerating trend, energy demand will likely start to strengthen and place upward pressure on prices that could structurally break above $150 a barrel as economic activity recovers,'' Merrill said.

The revised 2009 price forecasts are 20 percent lower than market consensus and 10 percent below forward prices, Merrill said. Preferred investments in the industry are ``quality names'' that offer ``solid valuation, visible catalysts and minimal oil-price exposure,'' it said, reiterating its ``buy'' recommendations on Oil Search Ltd. and Santos Ltd. among Australia-listed stocks.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net